Making smart investments: Quantifying the ESG value

• Infrastructure players need to be able to compare their projects` influence on ESG outcomes.
• Overlaying ESG data on top of an economic impact assessment provides valuable insights.
• We tested our model in Washington, D.C. which led to some surprising results.

It could get complicated very quickly and you could find yourself paralyzed by the unknowns and the variables. So, perhaps, don't overcomplicate it. Maybe there is a common tool that could be readily applied to give decision-makers, leaders and investors the basic data they need to get started. KPMG thinks that tool is an economic impact assessment.

“An economic impact assessment?” you say. “But we already conduct those on our projects.” You probably do. But most economic impact assessments are - as the name suggests - focused on just the economic side. They have not traditionally incorporated environmental, social and governance factors. But they can, and they should.

They generally start in the same way - analyzing and forecasting the short-term macroeconomic contributions of your project, such as GDP growth, jobs, disposable incomes, and so on. But then, that data is analyzed by industry sector, income group, and race or ethnicity so that the equity contribution can be calculated for households with varying levels of income. Next, you layer on the expected workforce development benefits and the environmental contribution that the project would make. So now, you're not just assessing the economic impact of a project, you are assessing its ESG impact as well.

KPMG professionals recently put the idea to the test. KPMG in the US worked with Regional Economic Models, Inc. (REMI) to conduct the analysis in a major US city. We chose the Washington, D.C. metro area due to its size and the diversity of transit, and we selected three existing or proposed infrastructure transit projects to test out our model: bus electrification, an extension of light rail, and an improvement to bicycle infrastructure.

For each project, KPMG professionals looked out ten years to 2031. We assumed that funding the projects was a non-issue (they would be entirely paid for with federal funding) and we expended the initial costs across the development of the asset. We used REMI TranSight and the REMI Socioeconomic Indicators (SEI) to overlay the key outputs of the transportation models with important socioeconomic data. We also customized REMI's PI+ model to integrate the findings.

Now let's go back to that scenario we imagined at the start of this article. Using the KPMG model and data, we could identify clearly which of the three transportation capital projects would deliver on the stated goal - driving economic growth and wage equity among ethnic and racial minorities. Our analysis tells us the share of jobs benefiting minorities. It tells us about the increase in disposable personal incomes. It pinpoints the average wage per job created. It can also tell you the reduced emissions and the total number of jobs created for one million dollars spent.

If Washington's local leaders wanted to focus on employment levels among ethnic and racial minorities, the extension to the light rail project is the clear winner. The illustrative example in our analysis could, on average, support nearly 3,300 jobs per year over ten years, with around 64 percent benefitting ethnic and racial minorities. If the city wanted to prioritize emissions reductions instead, it would invest in the bus electrification project: per dollar spent, it would deliver more than three times the emissions reduction of the light rail project.

The model is broadly applicable across sectors. Indeed, using this approach across multiple government functions would give government leaders even more insight into the best ways to spend their capital budgets. Infrastructure authorities could prioritize projects based on the key environmental and social outcomes they hope to achieve. The government would have quantitative forecasts against which they could measure their projects' success.

In an era of limited fiscal capacity and rising citizen and customer expectations around ESG, this approach should help governments, investors and decision-makers focus their capital on those projects that can deliver the most significant social and environmental outcomes at the lowest cost. A win-win for everyone.